America doesn't run on Dunkin' in the afternoons

The chain was strong in the morning, but traffic slows later on, and the company doesn't know why.

Dunkin’ Donuts needs an afternoon pick-me-up.

The Canton, Mass.-based donut and coffee chain struggled to a 0.8% increase in same-store sales in the company’s fourth quarter ended Dec. 30. Customers paid more for its coffee, doughnuts and breakfast sandwiches, but went into its stores less often: Traffic in the quarter declined, the company said.

The problem wasn’t in the morning, where the chain, with more than 9,000 U.S. locations, has concentrated much of its efforts. The company said traffic was “about flat” in the morning.

But the chain’s restaurants have started losing customers in the afternoons.

“Behaviors are changing,” David Hoffmann, president of Dunkin’ Donuts in the U.S. and Canada, said on the company’s fourth quarter earnings call Tuesday. “It’s a competitive environment. Traffic patterns and consumer behavior are changing in the afternoon.”

But Dunkin’ isn’t alone. Starbucks said last month that it has its own problems generating same-store sales in the afternoons, but has had strong sales in the morning.

Both brands, it seems, have strong morning dayparts where their loyal customers have continued to flock to their restaurants. But they appear to be losing business at times when customers aren’t so loyal.

Exactly why, however, is not entirely certain.

“We don’t totally know what the reason is, and we don’t think other brands know what the reason is,” Dunkin’ Brands CEO Nigel Travis said on the earnings call. He said the company is “very focused” on coming up with options to fix afternoon trends.

Much of that problem could be coming from McDonald’s, which generated 4.5% same-store sales growth in the fourth quarter, and which has been aggressively pushing its own beverages. The company upgraded its espresso-based drink offerings in the quarter and has been promoting its beverage value.

Dunkin’ stock was down nearly 2% in morning trading on Tuesday.

Dunkin’ Donuts generated a lot of new units in 2017, adding 313 in the U.S. and 440 around the world.

The company said that its revenue increased 5.3% to $227.1 million, while net income increased to $195.5 million, or $2.17 per share, from $56.1 million, or 61 cents, in the same period a year ago.

Net income declined by 1.7%, however, when it’s adjusted to factor out one-time events.

Yet the company does expect increasing profits this year thanks to lower taxes. The company received a $143.4 million benefit due to lower taxes in the quarter, brought on by the passage of the Tax Cuts and Jobs Act in December.

Dunkin’ says its tax rate this year will decline from 38% to 28%.

The company expects most of its franchisees will see benefits from tax reform, too, given that most of them are established as limited liability companies that get strong benefits on the package.

“It’s going to take a little bit of time for them to think this through, but we think it’s going to be beneficial,” Travis said. Whether operators use those benefits to increase growth, however, will depend on “their emotion with the business.”

The company said on Tuesday that operators are aggressively renewing their terms, bringing sons and daughters into the business—which executives held up as an example of franchisees’ confidence in the company. “It’s the healthiest I’ve seen in my 20-plus years,” Hoffmann said.

Dunkin’ did generate growth in its loyalty program, DD Perks, which now has 8 million members. And the company increased sales of consumer-packaged goods sold inside grocers and other retail areas by 30%.

The company simplified its menu in 1,000 restaurants in 2017 and expects to roll out that new menu nationally by the end of the first quarter—a move executives expect will improve operator profitability.

Same-store sales increased 5.1% at Dunkin’s sister company, Baskin-Robbins, the company said on Tuesday. For the year, the ice cream chain’s same-store sales were flat. Internationally, same-store sales at Baskin-Robbins grew 3%.

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